Keys to financial risk management for pork producers in 2025

At long last, the future strip is finally providing exciting opportunities for profits not seen in a couple of years. Profits give producers options for their operations, and frankly, they make the work more enjoyable for everyone in the industry. 

When looking at 2025 projections, we often discuss risk management plans with clients. These conversations frequently focus on hedge positions. To be clear and fair, a producer’s greatest risk – and opportunity – will always lie in production. However, from a financial perspective, risk management extends beyond hedge positions. Other metrics, such as cost of production, working capital and overall liquidity, must be considered. With that in mind, it’s worth stepping back to examine the bigger picture of financial risk management.

Earnings as the first line of defense 

Earnings are the first line of defense against economic adversity. In a commodity business, profitability is nearly synonymous with cost of production. Operations with lower costs of production are among the last to lose money during downturns and the first to recover in challenging economic times – a significant long-term advantage. Improving cost structures through better production practices, efficient corn procurement and similar efforts is a constant focus for today’s operations.

Working capital as a buffer

The next buffer to handle risk is working capital. Though easier said than done, producers should focus on building a financial “war chest” during times of profitability to prepare for lean periods. For example, in Compeer Financial’s Pork Producer Financial Index, working capital was over $1,400 per sow in Q3 2022. By the end of Q2 2024, it had fallen to just over $720 per sow. While this decline is concerning, the strong position entering 2023 helped absorb economic headwinds. With today’s future strip indicating above-average profitability for next year, producers should strongly consider rebuilding working capital and addressing deferred maintenance capital expenditures (CAPEX).

Capital position as a key component

The third pillar of financial risk management is the operation’s overall capital position, particularly assets that can be leveraged to provide additional liquidity, such as unencumbered farmland. There are two key points to consider:

Investments outside the farming business, while valuable, often cannot be leveraged. Producers should factor this into strategic capital allocation decisions.

Securing liquidity during good times, when it’s not urgently needed, is a prudent move. For example, putting a term revolver in place on unleveraged assets during profitable periods can provide additional liquidity. Combined with a strong working capital position, this approach can create a robust buffer to weather the pork industry’s economic cycles.